Malloy takes big gamble on unprecedented labor savings

Nearly one-third of Gov. Dannel P. Malloy’s solution to state government’s budget crisis hinges on a labor savings target more than five times the employee wage and health benefits concessions secured just two years ago.

budget pie--labor

The $1 billion savings target Malloy proposed to help close a projected $3.2 billion deficit for the coming fiscal year isn’t the only component in his new budget plan, but could prove more difficult to achieve than either the $1.5 billion in new taxes, $750 million in additional cuts or $162 million in new Medicaid funds to be secured from Washington.

And while the governor didn’t identify how all of the labor savings might be achieved next year — or where a matching $1 billion he wants in 2012-13 would come from — he did outline a variety of wage- and benefit-giveback options that could cover about 40 percent of his target.

Those are the central components of the $39.94 billion biennial budget Malloy delivered Wednesday to the General Assembly, including a $19.74 billion spending plan for the fiscal year that begins July 1 and $20.21 billion in 2012-13.

The plan, which boosts spending 2.4 percent each year, also includes a promised consolidation plan that would reduce 81 state agencies down to 57, but only reduces an overall workforce of 46,585 by 159 — or less than one-half of 1 percent, next fiscal year.

After pledging to cut nearly $2 billion off the projected cost of maintaining current services next year, the new governor offered $750 million in specific reductions, focusing primarily on social service and Medicaid programs, a higher education consolidation plan and by waiving the same statutory-mandated increases in certain municipal aid programs that the legislature has disregarded for the past two years or more.

The biggest cut in the Malloy budget technically involves a “lapse” or relatively undefined savings still to be achieved. The governor announced this week that it would come from state employee wage and benefit concessions as well as other savings tied to rank-and-file labor and management.

But is it achievable?

“I know they (employees) have made them in the past, and I appreciate those sacrifices,” Malloy said in his budget address to lawmakers. “I appreciate the good and hard work they do every day, and I hope you do as well. But I need to ask them to do what I’m asking everyone else across the state to do: more, because their current wage, health care, and pension benefit levels are simply not sustainable.”

The governor outlined several potential concessions and the projected total savings over two fiscal years, including:

  • Moving state employees into a health benefits package like the one that covers federal employees, to save $100 million.
  • A two-year wage freeze to save nearly $300 million.
  • Three annual furlough days for the next two years to save $80 million total.
  • Delaying the retirement age to save $300 million.

Besides those potential concessions, which total about $780 million in projected savings over two years, the governor also suggested freezing longevity payments, increasing medical co-payments to save “millions more.”

“These are only some of the ways we can get to that $2 billion dollar figure,” Malloy added. “There are many others. But let me be clear: we have to get to that number.”

The administration wrote in its budget summary that “the alternate route to a balanced budget–deeper spending cuts–will leave the (social service) safety net in tatters and core services decimated.”

Yet if recent history is any guide, Malloy could have great difficulty hitting his target despite the administration’s strong words.

State employees rejected the call for concessions last spring from then-Gov. M. Jodi Rell.

The two sides did strike a deal in May 2009 that technically saved the state budget $902 million across the 2008-09, 2009-10 and current fiscal years.

But $537 million of the total involved temporary savings from a retirement incentive program and from deferred pension contributions — two gimmicks that Malloy has decried and have helped leave the state employees pension program in its worst fiscal shape since its creation in the mid-1980s.

Rell did get most workers to accept a one-year pay freeze in 2009-10, seven furlough days to be taken over two years, modest increases in health insurance premiums and prescription co-payments and a requirement — only for workers with less than five years of experience — that they contribute 3 percent of their annual pay for retirement health care.

The concessions that came out of workers’ pockets totaled $153.3 million last fiscal year and $209.8 million this year, or an annual average of $181.6 million, according to nonpartisan legislative analysts.

During the prior recession, in December 2002, then-Gov. John G. Rowland ordered 2,500 layoffs after failing to strike a concession deal with workers.

Most of those layoffs later were rescinded as Rowland and the legislature replaced it with another early retirement incentive program.

As a Democrat who enjoyed strong labor support that was crucial to his win on Election Day, Malloy already holds one advantage over his two Republican predecessors.

Malloy insisted throughout last fall’s campaign that he wouldn’t press unions for wage or benefit givebacks without first hearing their ideas to improve efficiency without concessions.

The governor noted publicly on Feb. 2, though, that while he remains open to hearing those ideas, he needs proposals that would provide immediate and significant savings.

But most of the unions’ suggestions require an initial investment or are geared to produce savings over the long term.

“They’re not nearly enough” to help in the coming fiscal year, Malloy said Wednesday.

The State Employees Bargaining Agent Coalition, which negotiates benefits for all state employee unions, offered a cautious response to Malloy’s address.

“The governor obviously laid out a challenging agenda,” SEBAC spokesman Larry Dorman said. “But we’ve said before, Connecticut has a revenue problem, not a spending problem. … But we intend and vow to remain a constructive force working with the administration.”

Neither the governor, his staff, nor his budget have referred to layoffs as a possibility, but neither have they ruled them out.

But even were Malloy to order layoffs, several factors typically cut the first-year savings in half, according to an Office of Legislative Research report.

  • Depending on the union involved, workers must receive two to eight weeks’ notice.
  • Because the first two weeks of all state workers’ salary is withheld and not paid until they end employment, that expense also must be met.
  • Accrued sick and compensatory time must be paid.
  • Payments to the Unemployment Compensation fund increase
  • Pension fund contributions, which average 39 percent of workers’ salaries according to the Office of Fiscal Analysis, are fixed for the year based on an actuarial study prepared the prior fall.

The Rell administration calculated last November that had the administration laid off 5,000 workers–roughly 1/10th of the work force–to cut costs in 2009, the savings in 2009-10 would have been just under $300 million.

Further complicating matters, other aspects of Malloy’s budget plan could work against a deal with state unions.

Most unions are represented on a coalition that recently proposed a series of income tax hikes aimed exclusively at households earning more than $150,000 — and top rates on millionaires that would surpass those levied in New York . But Malloy focused much of his plan to raise an extra $878 million income taxes on households earning less than $200,000 and has insisted that Connecticut’s rates on top earners remain substantially below those of neighboring states.